Journal Issue
Finance & Development, June 1978

Fund activity: Second Amendment of Articles of Agreement enters into force; quota increases under Sixth General Review; new valuation of SDR; summary of Fund transactions; Fleming Memorial Conference papers in book form; selected data on Fund holdings and commitments

International Monetary Fund. External Relations Dept.
Published Date:
June 1978
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Second Amendment of Fund Articles in force; changes made in powers and organization

The Second Amendment of the Fund’s Articles of Agreement entered into force on April 1, 1978 following its acceptance—as required under the Articles—by three fifths of the Fund’s members representing four fifths of the total voting power. The Amendment enters into force for all members. The Fund’s Articles of Agreement were amended for the first time in 1969, when the special drawing right (SDR) was established (see “Chronology of international monetary reform,” pp. 19-22).

The modifications of the Articles that will be made by the Second Amendment are pervasive and—in the provision legalizing members’ freedom to choose their exchange arrangements—represent a complete departure from the central feature of the original Articles, the par value system.

At a press conference held at the Fund’s headquarters in Washington, D.C. by senior Fund officials on March 30, 1978, one official noted that “one of the main themes in the Amendment is, first, that in a very important way it updates the powers of the Fund and the rules of the Fund, constitutional rules, relating to exchange rates and the conduct of exchange policies by members. It makes possible … a virtually full range of free choice for members as to the exchange system they adopt. But it also gives the Fund powers of surveillance over the conduct of exchange rate policies by its members. So for the first time in some years now, it puts us in a position to declare the arrangements of all members fully consistent with the Articles of Agreement of the Fund and enjoins us to exercise firm surveillance over their conduct in applying those arrangements and gives us additional powers.

It is useful to note that one of the powers of the Fund, over time, will be to make recommendations with respect to general exchange arrangements. Therefore, although new exchange arrangements cannot be imposed on members, and they always will have the freedom of choice—even if in future a par value system were restored under the new Articles—the Fund can make recommendations for general exchange arrangements. Because a very high proportion of voting power is necessary for those decisions, the likelihood is that much of the membership of the Fund would switch to exchange arrangements of that kind.”

With regard to the definition of “exchange arrangements,” the Fund official said that “it is, of course, flexible; there is no precise formulation in the Articles. This technique is, in a way, typical of much of the new Articles. The spirit of the Articles will change from a rather rigid code, full of formulae, full of closely defined obligations, to a set of what has been called ‘enabling powers.’ As a result, although one might not be able to point to an immediate and striking change the next day, on April 2, that will make headlines, over time there are adequate and important powers to modify the international monetary system and to bring about changes, incidentally, without further amendment. That is indeed a big change in the spirit of the Fund and its possibilities for the future. Amendment is no easy task. This one has taken, in all, some five or six years to bring about.”

In addition to the new and flexible provisions dealing with exchange arrangements, the Second Amendment also provides for: (1) a reduction in the role of gold in the international monetary system; (2) for changes in the characteristics and expansion of the uses of the SDR that are intended to enhance its status as an international reserve asset; (3) the simplification and expansion of the Fund’s financial operations and transactions; (4) the possible establishment in the future of a Council to be composed of Governors of the Fund, ministers or persons of comparable rank; and (5) improvements in a number of organizational aspects of the Fund.

Role of gold

In connection with changes which aim to reduce the role of gold, including the disposition of part of the Fund’s own holdings of gold, Fund officials were asked during the press conference for their views about the prospects for gold after the Second Amendment. The reply was that “it is very difficult to have any very clear views” on how the status of gold would be altered. “The main legal change is that it is no longer illegal for central banks to make purchases of gold at a price above the equivalent of SDR 35 per ounce…. Neither the Fund nor members are supposed to ‘rig the price of gold.’ Article VIII, Section 7, bears to some extent on this. This is a provision relating to the SDR becoming the principal reserve asset in the system. If members’ conduct with respect to gold and/or other reserve assets had a bearing on that general undertaking, the Fund could take a view on it.” The official added, in response to a question, that he saw no reason to believe that there would be an “active use of gold as a monetary reserve.” He also saw no reason to suppose that there would be active sales and purchases of gold among central banks.

Enhanced role of SDR

The enhanced role of the SDR and the changes in its characteristics and uses under the Second Amendment were the subject of a number of questions at the press conference. Asked to explain how the SDR would play a larger role in the monetary system, one Fund official replied that “changes in the uses of the SDR can be distinguished from changes in the characteristics of the SDR; these are two separate topics…. One important and immediate change under the Articles is that they can be freely transferred between consenting parties, and without any necessity to have a need to use reserve assets. They become much more like legal tender between monetary authorities.

Beyond that development, it is possible to conceive of new types of operations. For example, a member could use the SDR in discharge of any obligation without any transfer of currency involved in the transaction. You could have loans of SDRs. You could have pledges of SDRs. There is a range of possible operations almost as wide as the legal concepts of private law. All of these possibilities are available, and perhaps they are promising ways to make the SDR more like an international money.”

The SDR can still only be used among the members participating in the scheme; but there are now wider opportunities for permitting “other holders” to enter into SDR transactions. As one Fund official observed, “the categories of institutions that can be qualified as ‘other holders’ are not as limited as they were under the old Articles. They still do not include private holders, but… official entities are no longer limited.” Asked to cite examples of other official holders, he replied: “other international organizations, such as the World Bank, for example…. It does take a decision of the Fund to permit the prescription of an ‘other holder.’ It is not something that entities can do by themselves.” It could, the official noted, include most of the United Nations agencies.

The enhanced role of the SDR foreseen by the Second Amendment raised the question of whether the SDR is truly legal tender “in that there is an obligation to receive it” and, consequently, “would a recipient nation have the right to refuse development aid in SDRs?” The Fund official replied that there was a “sense of an obligation [to receive SDRs] only within the confines of the Articles of Agreement of the Fund itself. In certain circumstances the obligation will exist between members that are participants or between the Fund and participants.” Asked whether the World Bank might accept, for example, repayment of loans in SDRs rather than in (U.S.) dollars or “something like that,” one Fund official replied that might happen “if the prescription… of the World Bank by the Fund permitted that use. What the Fund will have to do with respect to another holder that it prescribes is not merely to prescribe the holder, but also the terms and conditions on which it can engage in transactions in SDRs. Incidentally, in that respect, there is again a broadening of the operations and transactions that other holders can engage in, for example, with other prescribed holders. There is a great broadening here also, but always it will be within the control of the Fund to lay down the terms.

It should be noted that one has to distinguish in this field between the SDR as a reserve asset, the asset issued by the Fund and transferred among parties as a reserve asset, and the use of the SDR as a unit of account. This use is worldwide and not in the control of the Fund, and the practice is spreading. But it is a means of valuing obligations, and to be distinguished from the reserve asset issued by the Fund itself. We have no control over who enters into obligations expressed in the SDR as a unit of account. One of the most remarkable phenomena of the last few years is the adoption of the SDR as a unit of account under any number of multilateral treaties as well as a few private contracts and a few statutes. It is worth saying that we have not had any discussions with the World Bank on whether they want to become ‘another holder.’”

The possibility of using SDRs “to mop up surplus dollars” (in foreign exchange markets), envisioned by one questioner, elicited the reply that, under the Second Amendment, “there are more opportunities for a participant in the scheme to transfer SDRs to the Fund as well as to other countries in the scheme and to acquire them from the Fund.” The official added that, if the implication of the question was that somehow the Fund could manufacture SDRs in this notion of mopping up, “that would not be possible. The Fund would have to use existing SDRs…. The only way the Fund can create SDRs is by allocation to participants.”

The efforts that have led to the Second Amendment of the Articles date back to October 1, 1971, when the Board of Governors adopted a resolution requesting the Executive Board to study all aspects of reforming the international monetary system.

(For further details, see IMF Survey, April 3, 1978.)

Quota increases under the Sixth General Review

On March 31, 1978, the Fund announced that it had been notified by 85 countries, representing 78.52 per cent of total Fund quotas, of their consents to increases in quotas under the Sixth General Review of Quotas.

The quota increases, which were proposed in a resolution adopted by the Fund’s Board of Governors on March 22, 1976, will raise the total of Fund quotas to SDR 39 billion from SDR 29.2 billion, if all members consent to the full increases proposed for them. The resolution provides that the increase in a member’s quota will not become effective unless the member has consented to the increase in quota and paid it in full. The resolution also provides that no increase in quota will become effective before: (1) the effective date of the Second Amendment to the Fund’s Articles of Agreement; or (2) the date of the Fund’s determination that members having 75 per cent of the total of Fund quotas as of February 19, 1976 have consented to increases in their quotas, whichever is the later of these dates. With the entry into force of the Second Amendment on April 1, 1978, both requirements have been met. Under the resolution, members that have not as yet consented to increases in their quotas may consent not later than one month after the effective date of the Second Amendment of the Articles. The Executive Directors may extend this period for consent.

Under the provisions of the resolution on the Sixth General Review of Quotas, members have the option to pay the entire increase in their own currency, or they may pay 75 per cent in their currency and 25 per cent of the increase in SDRs or in the currencies of other members specified—with their concurrence—by the Fund. Each member that has consented to the increase in quota at the time of the effective date of the Second Amendment of the Articles must pay the increase to the Fund within 60 days of that date; members that consent later must pay the increase within 60 days of the date on which they notified the Fund of their consent.

New valuation of SDR

A new decision on the valuation of the SDR was announced by the Fund on April 3, 1978. Effective July 1, 1978, the composition of the basket of 16 currencies that determines the value of the SDR is to be adapted on the basis of current data. The original basket, which went into effect on July 1, 1974, reflected the relative importance of member countries in the export of goods and services over the five-year period, 1968-72. The revised basket will be based on statistics for the period 1972-76. As a consequence, the currencies of Iran and Saudi Arabia will now be included, while the currencies of Denmark and South Africa, which are in the current basket, will not be included.

The amounts of each of the 16 currencies to be included will be calculated on June 30, 1978 on the basis of the average exchange rates for these currencies over the three months ending on that date. The shares of the currencies in the value of the SDR based on these exchange rates will be as follows:

Per cent
U.S. dollar33
Deutsche mark12½
Japanese yen
French franc
Pound sterling
Italian lira5
Netherlands guilder5
Canadian dollar5
Belgian franc4
Saudi Arabian riyal3
Swedish krona2
Iranian rial2
Australian dollar
Spanish peseta
Norwegian krone
Austrian schilling

The amounts of the 16 currencies will be such as to ensure that the value of the SDR in terms of any currency will be exactly the same, on June 30, 1978, under the revised valuation as under the present valuation.

The decision also stipulates that the composition of the basket will be adjusted at five-year intervals (starting July 1, 1983) unless the Executive Board decides otherwise at the time, so as to include the 16 member countries with the largest exports of goods and services during the recent five-year period (for instance, 1977-81 for the review in 1983).

First quarter Fund transactions

Members drew on the Fund’s facilities at a subdued rate during the first quarter of 1978. Purchases amounted to only $182 million, compared with a total of $3,424.4 million in all of 1977. More than half of the first quarter purchases were in the compensatory financing facility, while gold tranche and credit tranche purchases amounted to $30,003 million, and $53,250 million, respectively. On the other hand, repurchases by Fund members during the same period were at a sustained level, amounting to $854,133 million, exceeding purchases by $672.130 million. Total repurchases in 1977 amounted to $2,939.4 million, or more than twice the $1,272.0 million repurchased in 1976.

During the first quarter of 1978, the Fund held three monthly gold auctions on behalf of the Trust Fund, in each of which 524,800 fine ounces of gold were awarded to successful bidders. Gold was awarded under the common price method in the first two auctions and under the bid price method in the third. Bids were received for a total of 3,001,200 ounces, of which 984,800 ounces were bid for in the first, 598,400 ounces in the second, and 1,418,000 ounces in the third auction. Gold was awarded to successful bidders at prices ranging from a low of $171.26 an ounce to a high of $185.76 an ounce. The latter is the highest price at which gold has been awarded to date. The average award price in each of the three auctions was, respectively, $171.24, $175.00, and $181.95 per ounce. Net of payment by the Trust Fund for the gold (at the equivalent of SDR 35 per ounce), the sales yielded approximately $209.3 million in the first quarter, raising the total amount accrued from all auctions up to that time to about $1.17 billion.

Fund holdings of gold and SDRs, and commitments as at March 31, 1978(In millions of SDRs)
Holdings in the General Account
Special drawing rights1,238.8
Stand-by arrangementsAmount agreedAmount purchasedUndrawn balance
Gambia, The2.532.53
Sierra Leone9.027.002.02
Sri Lanka93.0055.0038.00
United Kingdom3,360.002,250.0021,720.00
Western Samoa0.730.73
Extended arrangements

Includes augmentation by repurchase equivalent to SDR 4 million.

Includes augmentation by repurchase equivalent to SDR 610 million.

Third phase through June 30, 1978 of three-year arrangement totaling SDR 67.2 million.

Second phase through December 31, 1978 of three-year arrangement totaling SDR 518 million.

Includes augmentation by repurchase equivalent to SDR 92.5 million.

Third phase through December 31, 1978 of three-year arrangement totaling SDR 217 million.

Includes augmentation by repurchase equivalent to SDR 38.749 million.

Includes augmentation by repurchase equivalent to SDR 4 million.

Includes augmentation by repurchase equivalent to SDR 610 million.

Third phase through June 30, 1978 of three-year arrangement totaling SDR 67.2 million.

Second phase through December 31, 1978 of three-year arrangement totaling SDR 518 million.

Includes augmentation by repurchase equivalent to SDR 92.5 million.

Third phase through December 31, 1978 of three-year arrangement totaling SDR 217 million.

Includes augmentation by repurchase equivalent to SDR 38.749 million.

In March the Fund reviewed the rate at which it pays remuneration on members’ creditor positions and the interest rate on the SDR. For the calendar quarter beginning on April 1, 1978, the rate will be 3.75 per cent per year, compared with the present rate of 3.5 per cent. The rate of interest and charges on SDRs for the same calendar quarter will also be 3.75 per cent.

Aldo W. Zanzi

Fleming Memorial Conference papers out in book form

The New International Monetary System, a book based on a conference held at the International Monetary Fund headquarters in Washington, D.C., on November 11-12, 1976, has recently been published by Columbia University Press. The conference was conceived as a tribute to the late J. Marcus Fleming and was jointly sponsored by Columbia University and the Fund to honor the former Deputy Director of the Research Department of the Fund and Professor of Economics at Columbia University.

The conference brought together 26 distinguished academicians, economists, and high officials in national and international monetary and financial institutions. The book contains the papers on different aspects of the international monetary system presented at the conference, comments by participants, and a brief summary of the discussion on each topic. It has been co-edited by Robert A. Mundell of Columbia University and Jacques J. Polak of the Fund ($12.50 from bookstores).

(The discussion of the conference was reviewed in “The new international monetary system: some issues” by Malcolm Knight and Joanne Salop in Finance & Development, June 1977, pp. 19-22.)

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